States Should Address Climate Change and Revenue Needs Together for Maximum Impact

As climate impacts worsen, states are increasingly feeling the sharp financial costs of protecting lives and livelihoods and shoring up and rebuilding infrastructure. But addressing climate change doesn’t just create costs — it also necessitates states raise revenue, cut tax expenditures, and plan for a fiscally responsible future. Our recently updated online revenue interactive now includes several options focused on how states and localities can raise revenue while confronting climate change, including making corporations pay for climate pollution, charging them more to drill for oil and gas, and identifying replacements for fossil fuel revenue.

States should make corporations pay for climate pollution. Increased public understanding of the link between fossil fuel use and the health and economic impacts of climate change is contributing to greater public support for taxing fossil fuel companies. Two such options are gaining traction in states:

• Enacting climate superfund laws. While a tax on current climate pollution has not yet passed in the U.S., state-managed funds that tax historic climate pollution — known as climate superfunds — are gaining traction. Vermont passed the country’s first of these laws last year, after devastating floods, followed by New York. Similar bills have been introduced in California, Hawai‘i, Maryland, Massachusetts, New Jersey, Oregon, and Virginia so far this year.
• Participating in cap-and-trade. Thirteen states have a cap-and-trade (also called cap-and-invest) program, a carbon pricing strategy that requires facilities in certain sectors to either limit the amount of greenhouse gas emissions they release or buy permits to emit above the cap. Cap-and-trade auctions have raised over $25 billion for states since 2005.

States can allocate the revenues they raise through these options to their general fund, but most currently allocate the majority to climate resilience projects that keep people and infrastructure safer during extreme events. Regardless, this can take strain off of the general fund by creating a dedicated revenue stream for projects such as upgrading transportation and school infrastructure, and lead to lower overall spending on health care and disaster relief.

States should charge oil and gas companies more to drill on public lands. A significant amount of fossil fuel extraction nationwide takes place on lands owned by the public, including states. States can collect more money from oil and gas companies by:

• Raising royalty rates. Last year, the federal government raised royalty rates — payments made to landowners in exchange for the right to extract resources from that land — for the first time in 100 years, from 12.25 to 16.67 percent. However, 16 states still charge a lower rate on state lands. States can boost revenue by updating royalty rates and fees on the leases that let coal, oil, and gas producers operate on these lands and by eliminating royalty caps. In 2024, a bill in New Mexico to increase the state’s 20 percent cap to 25 percent passed the House (but was not approved in the Senate).
• Eliminating subsidies. Several states — including Alabama, Colorado, Louisiana, Kansas, Montana, New Mexico, Texas, Utah, West Virginia, and Wyoming — can raise tens of millions of dollars annually while accelerating the transition to clean energy and reducing pollution by eliminating tax subsidies for fossil fuel producers. For example, Texas’s Enhanced Oil Recovery incentive — one of over 20 direct subsidies for oil and gas producers in Texas — cuts the severance tax rate for hard-to-reach oil resources. This subsidy cost the state $49.3 million in 2023, 25 percent of which would have gone to schools.

States should start planning now to transition revenue away from fossil fuels. All states rely heavily on gas taxes for transportation funding, and fossil fuel severance and property taxes generate significant revenues for many state and local governments. States should start planning now to replace these revenues, for example by:

• Collecting new severance taxes and property taxes. A recent analysis of 79 counties in top energy-producing states found that fossil fuels provided more than half of all local property tax revenues in 15 of the counties and more than 10 percent in 49 of the counties in 2021. In a few states, the problem is particularly acute: between 2015-2019, over 20 percent of the state’s own-source revenue in Alaska, New Mexico, North Dakota, and Wyoming came from fossil fuels, with Wyoming at a whopping 54 percent. States should increase severance taxes and invest them for future energy transition activities while planning for the new revenue sources they will need to eventually replace fossil fuels. These future sources could include raising severance tax revenue on critical minerals needed for clean technology, collecting property taxes from clean energy facilities, and leasing public land for solar and wind energy generation.
• Enacting road usage charges. Gas tax revenue, which makes up close to 40 percent of state transportation funds, has eroded because states generally do not adjust the taxes for inflation and in many cases have not raised them for years. Recently, revenues have fallen further due to the shift toward electric vehicles. Michigan saw an estimated $50 million decline in its gas tax between 2019-2021 and could see a cumulative hit of up to $470 million by 2030. Vehicle Miles Traveled (VMT) fees, also known as Road Usage Charges (RUCs), offer a progressive alternative. As of 2023, Hawai‘i, Oregon, Utah, and Virginia have enacted RUCs, and another 33 states plus Washington, D.C. had engaged in research or pilot programs to lay the foundation for enacting the charges.

Ultimately, in addition to ensuring that climate polluters pay their fair share in helping fund a just transition to clean energy and a safer climate future, states will need an ambitious suite of revenue solutions to effectively confront a changing climate. They can start planning for that now.